Service Charge Arrears – Can Landlords Recover Legal Costs?

by PropertyBlawg on June 5, 2020

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Dealing with service charge arrears, whether contentious or not, can be a stressful and costly time for landlords. Your legal team should focus on creating a strategy that moves swiftly, preserves your commercial relationships and reputation, and, very importantly, is cost-effective. To protect our clients’ financial situations, our arrears recovery specialists often discuss the possibility of recovering legal costs from defaulting leaseholders.

In this post, our lawyers clarify the rules on recovering legal fees for pursuing service charges debts and look at two recent cases, which highlight important issues landlords and their legal teams should consider when seeking to recover these costs.

General principles

Your lease plays a crucial role in determining whether you can recover legal costs from your leaseholder for chasing service charge arrears (including solicitors’ fees and sending letters). The leaseholder is not obliged to pay for anything that is not specifically set out in the lease. Your solicitor will examine the wording of the contract to determine whether legal costs for recovering arrears are included.

In most cases, the cost of chasing service charge debts is added to the debt amount. Again, your lease will establish if this is the case or not, and the leaseholder may challenge you if the wording is not clear. If you take your case to the Tribunal, these costs are not normally recoverable from the leaseholder, even if the Tribunal orders the debt to be paid in full. While in the county court, reasonable costs will be charged to the leaseholder if you are successful.

It is important to note that, as a landlord, you are expected to behave in a ‘reasonable’ manner when spending money on the building. If the arrears relate to unreasonable service charges, this may pose a significant challenge to recovering arrears and costs.

Make your intentions clear – Willens v Influential Consultants Ltd

In the case of Willens v Influential Consultants Ltd [2015] UKUT 0362 (LC), the Tribunal considered whether a landlord’s costs could be recovered ‘in contemplation of proceedings’. The tenant was appealing a decision of the First-tier Tribunal (Property Chamber) (FTT), which awarded the landlord outstanding service charge arrears. In this case, the Tribunal looked at emails and other communications that evidenced both the leaseholder and their solicitor knew of the landlord’s intention to issue legal proceedings if the service charge arrears were not settled. As a result, the Tribunal judge determined there was clear intent; therefore, the leaseholder was unsuccessful in their appeal.

This case makes it clear that a transparent and strategic process is required for recovery of service charge arrears, so there can be no doubt of the landlord’s intention to take legal action where the debt is not settled.

Contractual obligations are key – Chaplair Ltd v Kumari

The case of Chaplair Ltd v Kumari [2015] EWCA Civ 798 made clear the importance of the lease terms when seeking legal costs for chasing service charge arrears. Where claims are assigned to the small claims track, any costs awarded are minimal, and in some cases capped, unless the other party has behaved unreasonably. However, in this case, the judge ruled that small claims track procedural rules cannot overrule contractual obligations.

In Chaplair Ltd, the landlord was looking to recover service charge costs and unpaid rent from a tenant. The primary legal issues were dealt with in the county court and the Leasehold Valuation Tribunal (LVT), and subsequently, the landlord sought to recover legal costs. The district judge restricted the amount of recovery to £200, since the proceedings had been allocated to the small claims track. However, on appeal, the judge determined that the restriction did not apply, as the obligation to pay the costs did not stem from the court procedural rules but the terms of the lease.

This highlights the importance of having clear, well-drafted legal terms in your leases, which provide for robust protection of your commercial interests in such scenarios.

As we have discussed, recovering legal costs for chasing service charge arrears can be more challenging than you might assume. However, there are steps both landlord’s and their solicitors can take to ensure you are not left out of pocket.

Chandler Harris was founded in 1996, and since then the firm has earned an excellent reputation in property management law and service charge and rent recovery. For more insights on service charge arrears and other property matters, visit Chandler Harris’ website or connect with the firm on LinkedIn.

PropertyBlawg

PropertyBlawg

Property Law Blogger at PropertyBlawg
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